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Tuesday, September 28, 2010

Frequent contributor to this blog, Matt Franko, posted a brilliant observation in the comment section of the prior post.

He points out that the public's holdings of Treasuries exceed $10 trillion, which is more than total loans and leases outstanding. If the Fed were to raise interest rates it would constitute a HUGE fiscal transfer via the interest/income channel. This means that, while most of the "know-nothings" (including many Fed board members) are talking about the need to raise rates now to stave off an incipient inflation, doing so would result in just the opposite. Higher rates would give a huge income boost to the public via higher interest payments, without a concomittant increase in production. That would absolutely drive inflation higher. The Fed is unwittingly keeping inflation down by keeping rates at or near zero, yet their own members and much of the financial community and the public don't even realize this.

A second issue involves the effect of the large volume of reserves created as we buy assets. [. . .] The huge quantity of bank reserves that were created has been seen largely as a byproduct of the purchases that would be unlikely to have a significant independent effect on financial markets and the economy. This view is not consistent with the simple models in many textbooks or the monetarist tradition in monetary policy, which emphasizes a line of causation from reserves to the money supply to economic activity and inflation. . . . [W]e will need to watch and study this channel carefully.

Fed finally admits what MMT'ers have been saying for a long time. The "money multiplier" is fiction, which is why all their easing efforts have had zero effect on the economy, bank lending and inflation.

Friday, September 24, 2010

"A House panel, in a move likely to increase trade tensions with China, approved on Friday a bill that allows the United States to slap duties on goods from countries with fundamentally undervalued currencies."

This could be just election season political posturing or the start of something big for currencies, price stability and the persistent U.S. external deficit.

2. End the attack on free enterprise. This is very vague. I don't know what attack on free enterprise they are referring to. Perhaps it means repealing Finreg and all regulations so that big business can generate and hoard more profits at workers' expense. Maybe do away with minimum wage??

3. Roll back spending to pre-bailout, pre-stimulus levels.This would drop the amount of expenditure by over $1 trillion annually or another way to say it, reduce GDP by 7%!. That would put growth at best around -5.5%. With the multiplier effect it would probably be more like -15%. That's a full blown depression. This is how they intend to create jobs?

4. Hold weekly votes on spending cuts.As you can see, they're very serious about cutting spending. They will cut something from the budget pretty much every week.

5. Enact strict budget caps.Yes and enact a balanced budget amendment as well, which would ensure mass poverty for generations to come.

6. Net freeze on gov't hiring.Given that the vast majority of new jobs created this year were in the gov't sector, this means monthly payrolls will fall steeply into the negative. How do you think the market will take this?

7. End gov't control of Fannie Mae We tried this already--privatizing Fannie and Freddie and it led to the housing market collapse. So do they really want to bring this idea back to "save" the Federal Government $30 bln annually after it has already cost us trillions???

8. Repeal health care.Might not be a bad idea, but what do they replace it with? The old system, where 30 million people had no health care and insurance companies rationed as they pleased?

Some of their favorite sound bites that have no basis in reality:

"Federal Spending is 'crowding out' the private economy."

Where, exactly, is this crowing out? We are suffering from historic overcapacity in everything from housing, to plant and equipment to workers. And interest rates are at record lows. There simply is no crowding out.

"We cannot spend our way to prosperity."

Every successful businessman knows that you have to spend money to make money. They're supposed to be the party of business, but they don't understand that??

Wednesday, September 22, 2010

Countries everywhere have abandoned strategies to boost domestic spending because of real or perceived debt fears. Instead, growth policies have all become focused on exports. Whether you are talking about Europe, the U.S. Japan or China it's all about exports. The problem is, there's no one to sell to. In the past the United States was the buyer and because of this it was seen as the engine of global growth. But now the Obama Administration is looking to double exports in the next 5 years. How is that achieved? Currency devaluation and wage and income suppression. That's the problem, all the major countries are looking to boost growth the same way. It can't happen. That's why we're probably close to another leg down in the global economy or some kind of currency crisis.

The continuing resolution (CR) to allow the government to function beyond the end of the fiscal year Sept. 30 is likely the last legislation lawmakers will send to the president before breaking for the campaign’s home stretch. The resolution is needed to avoid a government shutdown, because Congress hasn’t cleared any of the dozen appropriations bills for fiscal 2011.

Here we go again. Just like 1995 when the GOP shut down the government under the "leadership" of Newt Gingrich, they are threatening to do it again.

The U.S. can't default because it is a currency issuing nation and its debts are denominated in its own currency. Under those criteria it can't default. However, if it voluntarily decides to stop paying its debts because these Republican crazies shut down the government, then yes, that's a default.

Saturday, September 18, 2010

Back in May of this year, the ECB started their Securities Markets Programme where the Central Bank intervened to purchase securities in both Government and Private debt securities markets.

Information is hard to find about the progress of this program, but here is a report on monetary operations (under the "Ad-Hoc" tab) related to the liquidity absorption of these purchases. Excerpt:

......A variable rate tender with a maximum bid rate of 1.00% will be applied and the ECB intends to absorb an amount of EUR 61 billion. The latter corresponds to the size of the Securities Markets Programme, taking into account transactions with settlement at or before Friday 10 September, rounded to the nearest half billion. As the settled SMP transactions last week were of a volume of EUR 237 million, it happens that the rounded settled amount - and the intended amount for absorption accordingly - remains unchanged at EUR 61 billion.......

So it looks like the ECB has so far purchased e61B ($79B) since mid-May. I have not been able to find any details about securities purchased or country of original issue, but the general suspicion is that some of the European countries with smaller economies that have larger, persistent external deficits were/are having problems with issuing their government securities and the ECB has stepped up as effectively a buyer of last resort. Three countries perhaps in this category are Greece, Ireland, and Portugal.

How does this $79B equivalent of purchases compare to the stock and flows of government securities of these three countries? Data from an OECD website here.

Accordingly this $79B of ECB purchases represents 60% of this recent flow measure.

If this ECB program is indeed focused on the liquidity of the government securities of basically just these three countries, it is probably a substantial factor in the ability of these countries to issue or at least issue at reasonable rates.

Thursday, September 16, 2010

We're getting a real time look at what policies are necessary to achieve Barak Obama's goal of doubling U.S. exports in 5 years.

Step 1. Destroy the dollar.

Making the dollar weak brings us instant export competitiveness. The only problem is, it reduces our real terms of trade, which is the same as saying it lowers Americans' standard of living relative to the rest of the world.

The Administration is attacking China now and pushing it to raise the value its currency so that ours can go in the toilet. That is their brilliant idea and it's also an idea that is adored by so many mainstream economists. Go figure.

Step 2. Enact policies that keep wages and incomes low.

By keeping incomes low we also achieve comparative advantage. Other nations find it more cost effective to buy our products if we don't pay our workers very much.

How do we keep incomes low? Simple. Give huge tax breaks to corporations that are not likely to be passed along to workers. Don't cut taxes for people; just for businesses. Keep unemployment very high so that people become so desperate they'll take any low paying job they can find. Reduce spending on education so that more people will have to settle for low-paying jobs. Cut social supports so that people become destitute enough to work for practically nothing. Target unions or any organizations that are countervailing forces to businesses.

Step 3. Repeat!

Those three steps toward greater exports for America are now happening. And for us Americans it means we will send more of the fruits of our labor to foreigners and we will have a lower standard of living, but hey, we will have created a few jobs. Yippeee!!!

This is probably a perfect example of how productivity increases can outpace general economic growth and result in more people being thrown out of their jobs, even though corporate results can be improving.

The ONLY way to manage against this trend at this point is through fiscal policy that leads to broad increases in incomes or direct hiring of the unemployed.

And instead we have the former Fed Chairman advocating for tax increases? Our leadership is indeed clueless.

Wednesday, September 15, 2010

"We should not have tax cuts with borrowed money, but we should have tax cuts, and the more as far as I'm concerned the better, but only in the context of bringing the deficit down," he said. "Unless we do that, I think we have very grave problems ahead."

Greenspan is certifiable. He's either gone off the deep end or just "talking the book" of whoever he is working for now. Pimco?? I guess they want him to help engineer a depression so that their Treasury portfolio soars and they end up managing all the money in the world and controlling the world. This is better than any suspense novel.

Great article by Michael Hudson here. Thanks to Tom Hickey, reader of this blog!

America got rich from the Progressive Era onward by a different kind of big government than we have today. From the Cumberland Road and Erie Canal onward, it provided roads and other basic services at public expense for free or at subsidized prices. The guiding idea was that the “return” to public investment should be measured by the degree to which it lowers the economy’s costs of living and doing business, not in the amount of income it could extract.

This threatens to be the kind of tollbooth program that the World Bank and IMF have been foisting on hapless Third World populations for the past half-century. The “infrastructure bank,” reports The New York Times, “would be run by the government but would pool tax dollars with private investment.” It would be a test balloon for financing “a broader range of projects, including water and clean-energy projects,” for which Democrats already are drawing up a blueprint:

“[Connecticut Democrat Rosa] DeLauro’s plan would create an infrastructure bank that would be part of the United States Treasury, where it would attract money from institutional investors, then channel the funds to projects selected by a panel. The program, which would make loans much like the World Bank, would finance projects with the potential to transform whole regions, or even the national economy, the way the interstate highway system and the first transcontinental railway once did.

“The outside investors would expect a competitive return on their money, so many of the completed projects would have to charge fees, taxes or tolls. In an interview, Ms. DeLauro said she would be “looking at a broader base,” meaning the bank would finance not just roads and rails, but also telecommunications, water, drainage, green energy and other large-scale works.

“But if the projects did not raise enough money, the Treasury might get stuck paying back the investors, a prospect that gave pause to so-called deficit hawks like [Ohio Republican Congressman Pat] Tiberi. In an e-mail last week, he said he agreed the nation’s road and communications networks needed to be improved but was concerned about creating another company like Fannie Mae that might need a bailout.” Sheryl Gay Stolberg and Mary Williams Walsh, “Obama Offers a Transit Plan to Create Jobs,” The New York Times September 7, 2010.

Tuesday, September 14, 2010

Another hollow victory for Obama. The bill will give money to banks, with the intention that they make loans. Apparently no one in the Administration understands banking, because lending is not constrained by reserves. How do they expect banks to lend to businesses without customers and sales when no one has a job or where millions have seen their incomes reduced to nothing??? Can't anyone in the Administration figure this out???

This money will sit on banks' books, just like TARP and other, similar measures. Or worse, it will go to big bonuses again for bank executives. It's looting the taxpayer to give money to business executives in the financial sector. Scandalous!!! We should have a revolt against this shit once and for all!!!

Monday, September 13, 2010

NJ Gov Chris Christie is not only a big, fat, lying, hypocrite, but a fascist as well. He's determined to destroy any last vestige of working peoples' income and dignity so that the wealthy and big business can gain.

Here he is berating a poor teacher and treating her like a piece of garbage while at the same time flaunting his hypocrisy when he says that the reason he had to cut the state's education budget was because the Federal Government did not provide enough money. (He will NOT increase taxes on the wealthy as another option.)

While a candidate for NJ Governor and since he has been sworn in, Christie ARGUED VEHEMENTLY AGAINST FEDERAL STIMULUS AND INCREASED SPENDING!!

His comments reflect monumental hypocrisy and an authoritarian arrogance. He's a fascist, but his approval ratings are very, very, high, suggesting that fascism is becoming popular in America.

Thursday, September 9, 2010

Pento is a Schiff automaton who went on CNBC recently and was so rude that usually docile Erin Burnett went ballistic and basically sent him out the door from CNBC with a kick in the ass.

Leaving that aside for a moment, listen to what Pento says in response to Burnett's comment that despite the fact that the debt has risen sharply, interest rates are at historic lows.

Pento says it's because "The Fed is keeping rates low by buying securities."

Duh!! Yes!!! That's how it works, Pento!!! The Fed sets rates, just as you stated, not the Chinese or Japanese savers or anyone else. These idiots--Pento, Schiff--are so blind it's amazing. I'm very happy that Burnett has pretty much banned this Schiff automaton from CNBC (quite a bit of moxie on her part), but it would have been great if she caught him on that piece of illogical reasoning.

Bank of Spain Governor and European Central Bank Governing Council member Miguel Angel Fernandez Ordonez said that ECB funding shouldn't become a "permanent channel."

I've been of the opinion that it's contrary to everything the ECB believes in, ideologically speaking, to be an open-ended funding mechanism for national governments. Ordonez seems to be echoing these sentiments.

If things start falling apart again I wonder how willing the ECB will be to continue funding without limit? There may be a point where they pull the plug and force national governments to submit to some very nasty medicine.

Net Withdrawals - Net Deposits = 149,838 for the month. This is a big number...quite a bit larger than it has been over the previous months of the FY. This would scale to a $1.8T annual fiscal deficit.

Friday, September 3, 2010

I posted this as a comment on the prior post, but I thought it was worthy of its own post.

I'm fine with the "Socialist" label if you want to pin it on me and if you believe that Socialism entails some kind of central planning. Because if that's true, then we're all Socialists even if we don't know it.

We've had central planning in this country for the past 40 years, perhaps not from the government, but from the corporate "state."

Everything we buy; all of our consumption decisions, plus, income policy, wage policy, trade policy, monetary policy, tax policy, the way the nation's resources, capital and labor are allocated...ALL of these things are dictated and decided by corporate interests. The government has been COMPLTETELY out of the equation with the exception of enforcing what these interests desire.

And what do we have to show for it? A vapid, ignorant, programmed consumer class that ends up buying lots of plastic junk that swiftly ends up in a landfill because some philandering golfer or the Kardashian girls tell them to.

Either that, or we have an arrogant coterie of professional gamblers who call themselves "financiers" who feel it's their birthright to eviscerate private savings, create untold havoc and instability and destroy companies because their "analyses" tells them it's okay to do so.

On the other hand, if I'm a Socialist because I want to see more public investment in infrastructure, education, health care, basic R&D and transportation, for starters, then by all means call me a Socialist!

I've added an approximate $300B red line of newly created reserve balances to the Feds current graphical report on existing reserve balances. This would represent the result of a potential new $300B round of "Quantitative Easing" that the Fed could enact in response to further economic weakness.

Why would the addition of the red line be meaningful when we have already experienced the so-called "stimulative effects" of the blue line that precedes it for 2 years?

Thursday, September 2, 2010

Modern money is merely a unit of accounting. When people ask, "Where does the government get the money to pay for this or that?" they fail to understand that the government's "money" is merely an accounting entry on a spreadsheet. To better understand this think about where you got the number "1" the next time you type it on your spreadsheet? Or the number "1000?" Or the number "100,000,000,000,000,000,000?" You just typed it in. Same thing with modern money. Many people have trouble with this idea because they still believe that money is something we dig up out of the ground.

Wednesday, September 1, 2010

Chief Economist Wesbury makes some misguided statements here in a Yahoo! video. At one point he makes the statement that $1 of government spending actually results in less than that amount of economic activity.

He is almost corrected by one of the moderators who reminds him that the US government is actually borrowing a lot of the 'money' from the Chinese so it should not be as harmful to the domestic sector!

If you understand Modern Monetary Theory, this almost becomes like an old 'Abbot & Costello' skit.